Cannes 2003 meeting

Meeting Summary
  • BLACKLISTSMarshall Langer
    • The OECD started with a list of 41 countries in 2000. They then removed Barbados, the Maldives and Tonga. Most of the remaining countries signed undertakings of transparency and for information-sharing. Seven “unco-operative” jurisdictions remain. At the time of the compromise on the EU Savings Directive, Donald Johnson – OECD Secretary General – indicated that the “committed tax havens” may not fulfil their existing commitments. The FATF has its own list, which continues to change. Companies in the Cook Islands, St. Vincent, and some other jurisdictions have great difficulty in opening a bank account anywhere in the world.
      Countries do not admit to having black lists. The Spanish black list can be found on the ITPA website. The Peruvian list is on their Revenue website. The Argentina list relates primarily to inter-company pricing, as do those of several other countries. The Belgian list is the most recent: it is long, but it relates only to subsidiaries of Belgian companies claiming participation privilege, and a number of out-of-the-way countries are included to save the inspector the trouble of checking their tax regime, (and some well-known tax havens are excluded, precisely because their status is well-known). The Brazilian list has some anomalies. Italy has two black lists, as well as a “white” list of countries, which in effect treats a few non-EU countries as if they were EU members. Japan has no list with names, but has an informal list, related to its CFC rules: a 25% rate is the threshold, so that Singapore is now covered. Some countries black list each other. The original Venezuela list was copied from Mexico and included Venezuela! Some places do not appear to exist – Damask, “Pacific Islands”, Ostrava (not a country, but a town in the Czech Republic), Qeshm (an island in Iran). Poland’s list included some EU countries – which will no doubt have to change when it joins the EU. Ukraine changes its list: it recently removed and then restored Cyprus. Hong Kong, Macau, Singapore and Costa Rica, which are not on the OECD list, are on some lists. The U.K. lists relate to CFC rules; countries on the “grey” list are there only as regards certain companies, but the Inland Revenue has new reserve powers to deal with “unfair tax competition”.

  • CROSS-BORDER LEASING: Where we are nowRichard Sowler
    • Tax-based leasing takes advantage of arbitrage between regimes. There is a distinction between a finance lease – which is a lease for the life of an asset, the equivalent of a loan in economic terms – and an operating lease – which is a short-term lease, where the asset has a residual value at the end. An aircraft, for example, with a life of 25 years may be depreciated for accounting purposes over its life, but in Ireland it is depreciated for tax purposes over 5 years. In the U.K., capital allowances are given to the beneficial owner; in Germany tax relief is given to the lessee who shoulders all the burdens of the asset. The rules vary between countries, and in some jurisdictions the tax allowances are ring-fenced.
      The rate of VAT follows the asset. Aircraft and ships may be effectively zero-rated. Cars are often discriminated against: a purchaser-user may get no relief, but a purchaser-lessor may recover the VAT on the purchase. The different approach of Germany on the one hand and the U.K., Belgium and Luxembourg on the other can eliminate VAT altogether on a leased car.

      Some countries still regard lease payments as a royalty, but the OECD now views them as business profits, and this treatment is generally adopted, except in the U.S. (which divides the payments between capital and interest). Anti-avoidance rules seek to prevent transfer of tax relief for the benefit of another jurisdiction; but the effect of the Lankhorst decision may be to restrict the operation of such rules within the E.U. The UK Court of Appeal approved last December a “circular” leasing scheme in Barclays Mercantile Business Finance v Mawson. A simple double-dip takes advantage of the different rules in Canada and the U.K. An Ireland/U.K. cross-border lease may generate allowances in Ireland and the U.K., and provide a tax-free lump sum to the UK lessee. Capital required for leasing transactions may be raised by securitisation.

      Offshore jurisdictions participate in various aspects of these transactions.

    • Many people wish to become resident in France. An individual who spends longer in France than in any other jurisdiction, or lives there with his family, or has his principal home there, or works there, becomes a resident. Civil law applies to a resident. He becomes “domiciled” there, subject to forced heirship, and his heirs subject to inheritance tax (up to 60%). France has no trust law, but recognises foreign trusts: France has not ratified the Hague Convention on Trusts, but has ratified a convention on agency, which embodies references to trusts; there bare provisions in the Tax Code relating to “fiducies“; there are provisions in the U.S. and Canadian treaties on trusts, and regulations relating to them, and there have been cases in the French courts where a trust has been characterised as a “suspended gift”. French law has no concept of an “estate” on death. Title to property can be divided between “usufruct” (life interest) and remainder.
      Many ways of holding French property have been utilised. To utilise an offshore structure is always a mistake. Property should be held directly or through an SCI. The important use of an SCI is to transform immovable property into moveable property: this is an advantage for individuals not otherwise affected by forced heirship (provided they do not die “domiciled” in France). People have used a Luxembourg company to avoid the French capital gains tax; but this is not generally to be advised for individuals planning to reside permanently in France – s123 bis affecting persons holding 10% or more in an offshore structure. A trust established in a common law country is never the right vehicle to purchase French property. The intending purchaser should always retain a notary with good international experience, and should never share a notary with the vendor.

      The marginal tax rate is about 50%, and some forms of income attract a further 10%. Above euro17m, wealth tax amounts to 1.8%. Inheritance tax can be as much as 60%. Life assurance offers a tax advantage, as does a “capitalisation contract”. A French life company or an EU company with a French presence should be used. The merit of taking out a life policy before becoming resident is that the asset is free of inheritance tax (not true of capitalisation contracts). Draw-down in year 5 is taxed at 25%, and in year 9 at 17.5%: this rate applies only to accumulated income. Part of an individual’s assets can be invested in a policy or capitalisation contract: on capitalisation contracts wealth tax is levied on the cost, but the growth is not. (This special benefit may be abolished by a future Socialist government).

      A beneficiary under an existing trust needs to consider two provisions in the Tax Code. Under 5120(a) all “produits” – roughly translated as “distributions” – are treated as income. Whetherproduits includes capital is doubtful. Under the U.S./France treaty, the IRS characterisation is recognised by the French Revenue authorities, but this provision is not easy to use.

      The 10% rule under s.123 bis is inappropriate to the situation of a beneficiary under a trust, but the French Revenue are apt to find “control” in letters of wishes, powers of protector etc.

    • Tax arbitrage is a trade-off of a tax cost in one jurisdiction for a tax benefit in another. But there are other cross-border tax advantages obtained by taking two deductions for the same outgoing – e.g. loan interest paid by a dual-resident company. After some hesitation, the U.K. curbed this in 1988 and the U.S. in 1986, so that the loss ceased to be available for group relief. Similar legislation was enacted in Australia, but in the mid-nineties, Australian limited partnerships came to be taxed as companies. A limited partnership formed in Australia is treated as resident there, regardless of the residence of its partners. It can be a member of a corporate group.
      An entity opaque in one jurisdiction but transparent in another jurisdiction can afford opportunities for double-dipping, without the restrictions imposed by the relevant anti-avoidance legislation – e.g. interest paid by an Australian limited partnership of which UK companies are members may obtain tax relief in both jurisdictions. A similar result can also follow from the use of an entity whose nature can be determined by a “check the box” type election; in this way a “triple-dip” may be obtained. Existing groups may be restructured to take advantage of these phenomena: it appears that the Ramsay doctrine has no application to such restructuring; the Australian GAAR does not.

    • Do not underestimate the paranoia of the U.S. after 11 September. The balance of power has changed: the rights of the individual will be swept away. The U.S. will get and use information. Everyone everywhere will be forced to join the system. Zero-tax and territorial systems will go. Corporations and individuals will have to pay tax somewhere. The U.S. will use the carrot of amnesties etc. as well as the stick. The U.S. will seek to make advisers into policemen.
      Israel has abandoned the territorial system and acquired many aspects of residential systems elsewhere. There are still some anomalous benefits for the US/Israeli resident. Italy’s amnesty programme has been very successful: taxpayers remain anonymous; money does not have to be repatriated. It offers an exit for delinquent taxpayers elsewhere. Italy has become an attractive residence jurisdiction. It seems unlikely that the U.K. will altogether abolish its non-domiciled rules.

      In the U.S., the Homeland Security Act of 2002 has created a large and powerful organisation with the mission of preventing terrorism. Electronic visa records, registration of Muslim state citizens and information about air travellers are features of the regime introduced by the Act. The Sarbanes-Oaxley Act is being extended: it pits advisers against clients. It applies also to foreign entities listed in the U.S., and may in the future apply to companies doing business with the U.S. CEO’s must sign the corporate tax return. Eight TIEA’s have been entered into within the last 18 months: the information to be provided extends to that relating to non-residents and is not limited to information relevant to local tax liabilities. The U.S. can easily get information from the Swiss, so long as the matter is described as “criminal”. The U.S. amnesty programme may be followed in Germany and South Africa. It requires the taxpayer to tell the IRS about everyone else involved, including professional advisers.

    • The offshore centre is a concept wider than “tax haven”, but remains ill-defined. “Black lists” have nevertheless been compiled and “bad guys” identified, and the OECD currently has seven “non-co-operative” jurisdictions. The Portuguese black list is different, for example, from the original OECD lists with 83 countries.
      The EU has achieved a large measure of unity and free flow of capital, as well as a single currency. Competitive devaluation has been replaced by tax competition, as a way of attracting investment. The import articles of the EC Treaty in this context have been Arts 81-6 (competition), Arts 87-9 (state aid) and Art 299 no.2 (regional development – applying to Madeira and the Canary Islands). The Commission has played a leading role, from the Monti Report of 1996 and the Action Plan for a Single Market of 1997. The ECOFIN meeting of 1997 adopted a Code of Conduct – a flexible concept, called “soft law”. It included the concept of “harmful tax measures”, which was considered by the Primarolo Review Group in 1998: sixty-six measures were regarded as “harmful”, and these are in principle to go by 2005. The Savings Directive is to come into effect in 2004: exceptions until 2010 have been allowed for Austria, Belgium and Luxembourg.

      The influence of the Commission is pervasive. The stabilisation of tax income to support the welfare state is crucial. The issues surrounding State Aid were considered in the Commission’s Report of November 1998. Ending harmful tax measures and regulating state aid in detail are the current principal objectives. Whether tax rates require to be harmonised is much debated: Ireland approved a 12.5% rate for active income, retaining some of the privileges for Shannon and the Dublin IFS; a revised regime for Madeira has been approved, and a revolutionary new regime has been proposed for Gibraltar. Madeira has been permitted a low-tax regime until 2011; Gibraltar intends a zero corporate tax rate. Malta and Cyprus have submitted their tax rules to the Commission. Malta is revising its rules on nomineeship.

      The future of the EU may be threatened by differences in foreign policy and defence, but tax competition rules appear to be responding to pragmatic negotiation.

    • The PCC offers a juridical solution to a business problem. Each cell has its own assets and liabilities, and the PCC has its own non-cellular assets and liabilities: it follows that the failure of the company or a cell does not affect the viability of the other cells. The PCC does the job of a string of subsidiaries, but more efficiently, and clearly free from the risk of “contagion” – of a liability of a subsidiary being attributed to another.
      The initial use of a PCC was to provide captive offshore insurance for clients not big enough to have a captive of its own. The investment industry came to use PCCs as a form of unit trust appealing to investors in civil law countries.

      The concept began in Guernsey. It has been followed elsewhere, though with different names and some different provisions.

      The PCC offers a structure for investment products of a wide variety of kinds. French residents can have advantageous tax treatment for a life policy running for 8 years. A PCC with 20 investors may achieve a U.K. capital gains tax advantage. A variable annuity for a U.S. taxpayer may be issued by a PCC. Or an offshore life assurance policy may be invested in a cell.

      The PCC is not without problems. First, is there a risk of a look-through for tax purposes. The PCC sometimes appears to be some kind of a combination of a company and a trust: what is a tax court going to say? Will it see a cell as simply its owner in disguise? The Bermuda legislation may have unwittingly given some support to the “transparency” argument. Secondly, is a cell really contagion-proof? If the assets are outside the country whose laws recognise a cell, will the other country recognise the ring-fencing? No such case has apparently yet been heard, but one may guess that if a really bad case is litigated, the court may want to sympathise with the aggrieved creditor. Nevertheless, the PCC is undoubtedly an interesting new concept, with potential for many uses – cell trustees, cell nominees, cell retirement plans and so on. The “rent-a-cell” offers substantial cost savings. If the concept is not pushed in an over-aggressive way, the PCC may have a reliable future.

    • The Court is now flexing its muscles in the fiscal arena. Taxpayers appear increasingly bold and national governments increasingly inadequate in combating their taxes.
      The Bachmann case is a starting-point for considering the influence of the Court. But the “cohesion” argument was not accepted by the Court in Danner. The pending Skandia case raises the question, whether discrimination between otherwise essentially similar resident and non-resident pensions schemes can be justified.

      In Lankhorst, the German thin capitalisation rules were successfully challenged: preventing tax evasion or providing fiscal cohesion were not defences. The consequences of this decision are likely to be far-reaching. The French and Finnish courts have reached an opposite conclusion on the compatibility of CFC legislation with double taxation conventions: the latter decision may yet come before the European Court. In the Swedish X and Y case, the refusal of “roll-over” relief was held to be discriminatory.

      A number of cases have dealt with residents of one member state receiving income from another member state – e.g. De Groot. Überseering BV (not a tax case) concerned national rules on legal capacity and the residence of companies. In the Bosal Holding case, the Advocate General has opined that the refusal of a deduction for expenses relating to the holding of subsidiaries in another member state was not permissable. The Court is expected to agree. In Óce van der Grinten, a charge levied under the UK/Netherlands tax treaty was regarded by the Advocate General as not inconsistent with the EU Parent Subsidiary Directive. The Court has yet to rule on the point.

      The Barbier case considered inheritance tax in the Netherlands: the Advocate General opined that the law was discriminatory as regards estates of non-residents. Similar views have been expressed in relation to exit tax (De Lasteyrie); the Court is expected to agree, and the case is likely to have widespread influence. The Marks and Spencer v Halsey case considered similar principles in the context of group relief.

      State aid rules are of increasing importance, as has been seen in Gibraltar. All these issues are destined to receive further and detailed consideration of the Court.

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